High-yield companies issue near record amount of debt

DeborahLevine

NEW YORK (MarketWatch) -- Companies are on pace to issue the most non-investment-grade debt on record, as investors continue to seek higher returns and credit markets return closer to normal, credit strategists at Bank of America Merrill Lynch said.

Companies with speculative credit ratings have sold $151 billion in new bonds globally, "just a stone's throw away" from the No. 2 spot registered in 2004 and 2007, Merrill analysts Oleg Melentyev and Mike Cho wrote in a research report.

Since the high-yield market has only been open for all practical purposes since May, companies have sold about $20 billion a month, the said. If issuers maintain that pace for just a few more weeks, total volume of debt sold could get close to the $172 billion sold in 2006, the most ever in a year, the Merrill analysts said in a report released Wednesday.

The growth in issuance is remarkable because the credit crisis over the last year pushed the yield that companies have to pay above Treasurys to the highest levels in years, effectively making it impossible for many to access the market. But as investors have resumed their willingness to take on riskier assets, including junk debt, that spread has shrunk dramatically.

The gap that high-yield issuers pay over Treasurys has fallen to 7.55 percentage points, the lowest since August 2008, according to Merrill.

That improvement has drawn in even more investors, helping the sector return a whopping 52% so far this year, reversing last year's loss twice over, according to an index compiled by Merrill.

"High-yield issuers will continue to use this favorable environment both to refinance existing debt, and possibly to start raising capital to finance [capital expenditures] and acquisitions," they wrote.

Another $4.6 billion in high-yield debt is expected to price sometime soon, according to Informa Global Markets.

Issuance in the investment-grade market has also come at a torrential pace as companies take advantage of the low interest rates as the Federal Reserve has pledged to keep benchmark borrowing costs low for a considerable period. See related story on high-grade debt.

"While the Fed continues to keep rates at these extremely low levels, the outflows from money market funds will continue to feed inflows into credit," the Merrill analysts said.

At the same time, the improving economy, along with being able to refinance debt coming due in the near term, the expected rate of bond defaults is seen declining, a welcome relief for bondholders.

Merrill expects a 5.7% default rate for the next 12 months and 5.1% pace by the end of 2010.

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